Category Archives: IRS

Reporting on the recent revocation of tax status of 275,000 nonprofit organizations, the New York Times reported the action shrinks the nation’s nonprofit sector by roughly 17 percent, to about 1.3 million charities, trade associations, membership groups and labor unions. The IRS took action against charities that failed to file required paperwork for three consecutive years.

While it shrunk the number of nonprofits on the IRS’ list by 17 percent, it certainly did not reduce the number of nonprofits by 17 percent since most of the 275,000 organizations were apparently non-existent for many years. The IRS indicated about one-quarter of the 275,000 received tax exemptions before 1980 and many simply stopped operating without telling the IRS.

Until a change in federal law in 2006, only organizations with annual revenue of $25,000 or more — roughly one-third of the 1.6 million nonprofit groups — were required to file.

That law, the Pension Protection Act, required all organizations to file returns, but because it was embedded in 393 pages of a law that otherwise dealt with pension issues, many nonprofit groups did not know that.

This process is another example of legislation which, while well-intended, provided little benefit while creating an enormous amount of work—both for those in the government sector at taxpayer expense—and for charities, requiring perhaps millions of dollars of charitable contributions to fund the expenses of impacted charities.

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Much has been written about the government’s crackdown on small charities.  Websites are replete with information about the Form 990-N filing requirement for nonprofits with gross receipts of $25,000 or less.

Sadly, much of the reporting has been less than accurate—and that is being very polite. Here are a few examples that are reflected on the Internet today by four different highly respected organizations:

• “Most faith-based organizations are not required to file Form 990.”  Highly confusing. This statement would be true only if churches are included in the definition of “faith-based organizations.” When the term “faith-based organizations” is used, the reference is usually to parachurch organizations exclusive of churches.

• “What organizations are exempt from filing Form 990? Faith-based organizations.”  False—same reason as above.

• “Certain organizations are not required to file Form 990. This includes religious organizations.”  False. There is no general exemption from filing Form 990 for religious organizations.

• “Charitable organizations other than churches that do not file a tax return with the IRS for three consecutive years now automatically lose their exempt status.” Close, but not quite. This is almost true but not quite. There are charitable other than churches that are not subject to this requirement, i.e, religious orders and integrated auxiliaries of churches.

So, it is no wonder there is confusion about how to comply with the law concerning Form 990-N. ECFA requires its members to comply with the law (Standard 4), but since ECFA members must annually have $$50,000 or more of gross receipts, the Form 990-N does not directly apply to ECFA members. However, some of our members provide assistance to other ministries which have $25,000 or less of annual gross receipts. Thus, this is an important issue for those member organizations.

Here are the short-strokes on this issue:

• Certain small (gross receipts of $25,000 or less during tax years beginning in 2007, 2008, and 2009) tax-exempt organizations that fail to satisfy annual filing requirements for three consecutive years are at risk of losing their tax-exempt status if they have not filed for 2007, 2008 and 2009.

• The “drop-dead” deadline initially set for May 17, 2010 has been delayed until October 15, 2010

• The latest announcement from the IRS is reflected on their website:  http://www.irs.gov/charities/article/0,,id=225705,00.html  

• Certain religious organizations are exempt from filing Forms 990, 990-EZ and 990-N. As described in the instructions for Form 990 (http://www.irs.gov/pub/irs-pdf/i990.pdf), those exempted from the filing requirement are:

  • A church, an interchurch organization of local units of a church, a convention or association of churches, or an integrated auxiliary of a church as described in Regulations section 1.6033-2(h) (such as a men’s or women’s organization, religious school, mission society, or youth group).

  • A church-affiliated organization that is exclusively engaged in managing funds or maintaining retirement programs and is described in Rev. Proc. 96-10, 1996-1 C.B. 577.

  • A school below college level affiliated with a church or operated by a religious order described in Regulations section 1.6033-2(g)(1)(vii).

  • A mission society sponsored by, or affiliated with, one or more churches or church denominations, if more than half of the society’s activities are conducted in, or directed at, persons in foreign countries.

  • An exclusively religious activity of any religious order described in Rev. Proc. 91-20, 1991-1 C.B. 524.

  • An entity under a group exemption. If you represent such an entity, it is wise to confirm your organization is listed on the annual Form 990 or other filing made by the organization representing the group. Otherwise, the filing of the Form 990-N may be appropriate.

Final thoughts.  Some organizations that believe they are exempt from the Form 990-N filing requirement are really subject to the filing of Form 990-N. Conversely, some who think they are subject to the filing are really exempt. How do you know whether your organization is subject to the filing or exempt from it? Consult your tax advisor.

The IRS recently released an interim report relating to responses to compliance questionnaires sent to 400 public and private colleges and universities. Colleges and universities make up one of the largest nonprofit segments in terms of revenue and assets.

After combing though the report, I noted several items of particular interest:

1. Endowment funds. The target spending rate for endowment funds in the study range from 4.7% to 5.0%. Charles Grassley, (R-IA) has pushed hard for a minimum 5% endowment spending rate. There are some that might suggest the 5% goal effectively becomes a ceiling on the endowment spending rate.

2. Highest paid employees. In the case of large organizations, the highest paid employee was often a sports coach—(43% of organizations).

3. Use of the rebuttal presumption.  More than half of the organizations in each size category reported using a rebuttal presumption process to establish key compensation. On all size levels, the use of comparability data to establish compensation was present less frequently that the other rebuttal presumption factors (adequate documentation and approval by an independent governing body). One would have expected the percentage of organizations using the rebuttal presumption to be much higher.

4. Conflict of interest policies. While 80% of organizations in each size category are reporting having conflict of interest policies covering members of the ruling body and top management officials, it is surprising that this percentage is not 100%.

5. Unrelated business income. One key issue the IRS has identified through the survey is that many public and private institutions are involved in business activities that they are not reporting as taxable income to the federal government.

   Most of the institutions surveyed also are not seeking out expert advice to determine whether to report those activities, the agency found. More of the institutions surveyed also are not seeking out expert advice to determine whether to report those activities, the agency found. More than 60% of all the colleges responding to the survey reported that they did not rely on independent accountants or the college’s general counsel on such matters.

6. Disclosure of financial statements. Only 76% of small colleges and universities reported making their audited financial statements available to the public while 91% of medium-sized organizations and nearly 97% of large colleges and universities reported doing so. ECFA members are required to make their financial statements public. It is surprising that 100% of the organizations studied are not committed to this important step of transparency.

7. Compensation policy. Only 34% of the smaller organizations had a formal written compensation policy and even the large organizations only averaged 63% with a formal written compensation policy. These numbers are surprisingly low.

The IRS said it has already begun audits of more than 30 institutions based on their responses to the survey. Thirteen institutions that did not respond to the IRS questionnaire are also being examined, as well as an undisclosed number of colleges that did answer all of the questions, the agency stated. The IRS has not identified the institutions that were sent the questionnaire nor the colleges that are getting audited.

It will be interesting to see if this compliance project becomes a model for questionnaires and compliance in other niches in the nonprofit arena.